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How Government Works

Our first career was in the public interest sector.

We joined a conservative pro-taxpayer advocacy group called the National Taxpayers Union. It was a tiny, hole-in-the-wall organization – so small we quickly rose through the very thin ranks to become its executive director… at 26 years old.

That experience was instructive; from it, we got our distrust of Washington and our abiding cynicism towards politics.

The government doesn’t function the way most people think. And it certainly doesn’t function the way it is described in the high school civics books.

As the great Italian economist Vilfredo Pareto explained back in the 19th century, it doesn’t matter what you call your government or what you put on paper in terms of a constitution.

What happens is this: Smart people – Pareto called them the “foxes” – go where the power is. They figure out how to control it… and how to use it for their own benefit.

The few find ways to exploit the many, in other words. That’s how government always works.

Same Old Hustle

Few people had any illusions about it in the days of the Pharaoh or the Roman Empire… or in the era of kings and queens.

Rulers had whips in their hands; they didn’t mind laying the lash on the backs of their subjects.

But at least the latter knew where they stood. They understood, too, that they should hide their wealth when the tax collectors came knocking… and make themselves scarce when the feds needed soldiers.

Then, with the rise of democracy, it became harder to see what was really going on. The nature of government became hidden in myth and balderdash.

“We” elect our leaders, is the popular delusion; they do what “we” want.

We have a government “of, by, and for the people,” is how President Lincoln put it, after killing a half million of them.

“Government is all of us,” said a famous jackass.

How does it really work?

Facts fade by the square of the distance from their source.

So, the voter in Montana has little idea of what plums are hidden in Obamacare… or what exactly a 19-year-old from Helena is supposed to be doing in the Hindu Kush… or why U.S. sugar growers need to be protected from competition from Brazil.

“The people” have no idea how their laws or their sausages are made: They have no idea what is in them.

This allows the foxes to get away with grand larceny… and even murder. All they have to do is bamboozle the masses with patriotic slogans, economic claptrap, and flimflam solutions to problems and challenges that, often, they caused themselves.

Starve the Beast

Back in Washington, at the National Taxpayers Union in the 1970s, we saw the dots. And we connected them.

America had the largest, freest, most dynamic economy in the world. But now, the foxes were moving in.

The feds were getting more and more bossy. More agencies. More regulations. More laws and more taxes.

Back then, consumer price inflation was rising… as the feds financed more and more of their programs with printing press money. How could this be stopped?

“Starve the beast,” was the idea.

If taxes could be cut… and contained… the federal government would be deprived of resources. The feds could be brought under control.

That was our mission at the National Taxpayers Union. We showed the public how money was wasted. We called for tax cuts to limit the waste… and control the growth of government.

And we were making progress…

Indexing the tax bands for inflation, for example, saved people from “bracket creep,” which raised their taxes automatically.

Meanwhile, conservatives were learning how to use the debt ceiling to slow the growth of federal borrowing.

Reagan Revolution

But then… Ronald Reagan appeared. He was our Jan Sobieski. He was our Spartacus. He rode out from California with an army of knights, all in shining armor.

He promised not only to cut taxes… but to trim the government itself.

And after Reagan was elected, we thought – briefly – that the battle had been won. A major tax cut was enacted. The beast hadn’t been tamed. But he was on a leash… and on short rations.

But wait… something went wrong. Taxes were cut. But the beast didn’t starve. Instead, he grew fatter, sassier, more aggressive than ever.

What happened?

In a few words: We were betrayed. The Reagan team learned that “deficits don’t matter.”

They didn’t matter politically. And they didn’t seem to matter economically either. The feds could run up as much debt as they wanted.

President Reagan added more debt than any president since FDR.

Did the dollar drop?

No.

Did inflation go through the roof?

No.

Did the stock market crash?

Nope again.

Just the opposite: Stocks soared. Inflation declined. The dollar was stronger than ever.

How was that possible?

Tune in tomorrow…

Regards,

Bill

Currency Insight: The Dollar’s Rally Hits a Wall

By Jeff Clark, Editor, Market Minute

The U.S. Dollar Index ($USD) measures the value of the U.S. dollar relative to six of its most popular trading partner currencies.

$USD has rallied 2% in just over two weeks. That may not seem like much compared to high-flying technology stocks that can move that much in an hour (though not in the recent low-volatility environment). But in the world of currencies, a 2% move in two weeks is HUGE.

The buck had been in a steep downtrend all year. We started looking for the dollar to find a bottom in late August, and again in mid-September. Both times, the $USD chart was starting to form a bottoming pattern with positive divergence on the momentum indicators. So, we figured the dollar was nearing at least a short-term low.

Since then, $USD has moved sharply higher. Take a look…

The buck has bounced all the way back up to where it was trading in late July. And it’s been a pretty good bounce off of the bottom.

But now, the dollar is approaching resistance. And, if history is any sort of a guide, the dollar is unlikely to break through this resistance level on the first attempt.

Look at how a similar pattern on the chart played out in 2016. The dollar bottomed in early May last year. The rally off of that bottom ran into the resistance of a previous high. Resistance held, and the dollar fell back and formed a higher low. It took another month before the dollar was able to break out above resistance.

I expect we’ll see similar action in $USD this time around as well.

The buck has enjoyed a good bounce. Now, though, it’s time for a pause. The dollar is likely to pull back soon and take some time to form a higher low on the chart. A couple of weeks of back-and-forth, choppy action will help the buck build up enough energy to break above resistance on the next attempt.

– Jeff Clark

P.S. Every morning the market is open, my Market Minute newsletter tells readers where the action is headed for the day… including which sectors to watch and which to avoid.

If you’re an active trader, it’s a valuable tool for preparing your day. If you’re not an active trader, you’ll learn tips that’ll make you a vastly better investor. To automatically receive the Market Minute for free right in your inbox, click here.

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Mailbag

You miss the MAJOR reason Congress will strongly want to pass this tax bill. First, this bill will increase corporation earnings and the stock market will go up smartly. This happened in the past. House members mostly own stocks, so they will benefit by passing this bill.

When the corporate tax rate was cut in the past, those companies paid BIG dividends to owners of stocks. Congressmen will benefit by passing this bill yet again. Follow the money.

– Carl T.

The only way a tax cut could work is if government spending is reduced significantly. This is necessary, but there has been no talk of this. Implementation of the flat tax would be great. Then downsize the IRS. Give education back to the states where it belongs, then eliminate the Department of Education. Eliminate the Department of Housing and Urban Development and the Department of Energy. These actions would greatly reduce the deficit.

– John M.

I believe some of your assumptions or data interpretations are deceptive. You say corporations don’t buy capital goods, but buy back their own shares. I say in my best Hillary impression: “What difference does it make?” That money ends up circulating in and boosting the economy either way, thereby raising tax revenue. One may argue about the size, but not the effect.

The average effective corporate tax is 22%. But you can still drown in water of average depth of only inches. This tax average is made up of the GE’s, who pay zero, and small businesses not sophisticated enough to use loopholes and lobbyists and pay the top rate. This is a fairness issue as well.

The same goes for the rich vs. the not-so-rich and middle class. Sometimes less is actually more – 20% of something is more than 70% of nothing.

Unless you like the status quo, get behind this tax bill, Bill. Are you a capitalist or capitulate to the Deep State?

– Erich K.

Today’s Diary was one of the best I’ve read: thoughtful, hilarious, opinionated, wise. Notwithstanding comedy and doctrines, higher-order investments, such as research, infrastructure, and investment (in factories and workers), encouraged by low interest rates, has been determined not to be in the best interests of U.S. corporations over the long term. I don’t disagree.

When you’re a company like Coca-Cola, McDonald’s, Campbell Soup, or Walmart, do you really need more money to succeed at what you’re already doing successfully? Fake money alone is not the source of the problem… What I call Cartel Economics since I was in college is the source of the problem.

Investment banks and unionized companies – Goldman Sachs AKA Gangster Bankers, GM AKA Government Motors, etc. They get taxpayer-funded bailouts for failures that deserved to fail and go under to Hades.

– Rex P.

In Case You Missed It…

After the financial crash of 2008, some investors recovered quicker than others…

That’s not because these people were smarter or luckier. They simply shifted their wealth to a new “stock market” 100% outside of Wall Street. And they had the potential to make 852%, 1,400%, and even 6,333% in a matter of months. Read on here.

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